Many credit-counseling agencies promote themselves as "non-profit organizations," a fuzzy-sounding term that evokes images of soup kitchens and animal rescue shelters. But in an advisory last week, federal and state regulators warned that some of these agencies aren't as "friendly" as they may seem. Instead, they may be using non-profit status to evade consumer protection laws and take advantage of trusting consumers.
To qualify for non-profit status, agencies are supposed to offer education and counseling services. But some agencies are more interested in hustling clients into debt-management plans, which are much more profitable to credit-counseling agencies.
In a typical debt-management plan, the client agrees to pay the agency a certain amount of money every month, which it uses to pay bills. In return, credit card companies may waive late fees or lower the client's interest rate. Credit card companies typically give the credit-counseling agency a percentage of the amount repaid.
Critics of this operation say tha clients are pressured to sign up for plans, even if they don't need them. Worse, some agencies fail to pay bills on time, triggering penalties.
While there are many credit-counseling agencies that provide a valuable service, there are just as many scam artists out there too, as the industry is largely unregulated. If you're struggling with debt, a reputable agency can help you get your life back. Talk with several agencies before selecting one. Other safeguards:
• Don't let your guard down just because an agency says it's a non-profit organization.
While non-profit status suggests a credit counselor has your best interest at heart, that's not always true. There are some very good credit-counseling agencies, and some very bad ones, and non-profit status has nothing to do with it.
• Be wary of "voluntary" contributions and high monthly service charges that can inflate your debt.
High fees will reduce the amount available to pay your bills. Before signing up for a debt-management plan, ask for a written statement describing all fees.
• Avoid agencies that claim they can get you out of debt quickly, or say they can slash the interest rate on your credit cards.
Credit card companies, not counseling agencies, determine the interest rate, and many creditors don't lower rates as much as they did in the past, Plunkett says.
Once you start a payment plan, check with your creditors to make sure the counseling agency is paying your bills on time. Otherwise, you could get smacked with late fees and penalties. You may also want to ask the agency if it belongs to the Association of Independent Consumer Credit Counseling Agencies, www.aiccca.org, or the National Foundation for Credit Counseling, www.nfcc.org.
Both groups require members to abide by specific standards and limit the amount of fees they can charge.So is there a such thing as a free credit counseling agency? No. Nothing exists without some sort of profit. But there are quality agencies out there ready to help you; it's just a matter of finding the right one.
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